CAUSES OF ACTION: 1) Premature Commencement: Promoter Liability. 2) Defective Incorporation: MBCA: Stamp Date, Non-MBCA: du jury substantial compliance, de rd facto good faith attempt, estoppel, 3 party relied on corporate form. 3) Piercing the Corporate Veil: Lack of adequate capitalization, using corp property for personal use, illegal use, alter ego, no corporate formalities, injustices and inequitable consequences if not pierced. 4) Ultra Vires – “Beyond Powers” for Specific Purpose, 5) Ultra Vires – Using corporation to donate to Charity (cannot be unreasonable amount or a conflict of interest). Also look to Due Care and Loyalty when see this. 6) Stock Issuance not Authorized by Articles (Class of stock not in Articles) 7) Inadequate Consideration for Stock. Cash = Bonus, Property = Watered, Services (Good faith, fair value). 8) Invalid Director Meeting (Notice, Quorum, Valid Vote). Invalidates decisions made. 9) Removal of a Director for Cause 10) Director entering into K on Company’s behald w/out BOD approval. Liable for actions, except: a. McShaw Exception (After the fact BOD approval w/full knowledge & no substantial harm).
11) Invalid Stockholder Meeting (Notice, Quorum, Record Date, Proper Matters). 12) Invalid Voting Trust (Trustee Record Owner as of Record Date & in writing) 13) Motion to Compel Dividends ( 14) Invalid Stock Encumbrance (Notice, Reasonable) 15) Lack of Dividend Payment (Public – Business Purpose, Close – Bad Faith) 16) Illegal Distribution (Solvency Test & Proper Source Test) 17) § 14(a) Failure to disclose a proxy solicitation. (proxy solicitation, § 5, regulated under ’34 act) 18) § 14(a)(8) Motion to compel shareholder proposal inclusion in a proxy solicitation. a) Trigger: Management has refused to place a stockholders proposal in a proxy statement. b) Record owner at time or proposal or either, 1% or $2K of voting stock, both for one year prior. c) No proper grounds for exclusion. i) Ultra Vires – If shareholder would have to amend the articles (under MBCA juris) ii) Ordinary Matters, unless social policy enables. iii) Election of BOD (cannot propose new slate) iv) Cannot propose items counter to management proposal. d) Look for BOD ignoring proposal, losses because or proposal, then breach of due care. 19) § 14(a)(9) Material False and Misleading statements or omissions in connection with a proxy solicitation. (Materiality, Simple Negligence, Essential Link). a) Plaintiff: Shareholder who’s vote was required b) Defendant: Another shareholder or BOD. c) False or misleading statement of omission d) Material (Sub. Likelihood a rx person would find important) e) Intent: Simple negligence f) Causation: “But for” essential link. g) Damages: Lower share price. 20) § 10(b)(5) Insider Trading – No manipulation a) Plaintiff: Anyone who contemporaneously sold & SEC. b) Defendant: Self Dealer, Tipper, or Tippee Elements: Tipper Liability: (1) Tipper: Insider or constructive insider - Owes a duty of trust to corp. (2) Inside Info: Gives out non-public info in breach of duty that has a substantial likelihood a reasonable person would find it important. Tippee & Subsequent Tippee Liability under misappropriation theory: (3) Tippee: Must have a bona fide Tipper who breached their duty (name it). (4) Intent: Willful. (5) Reliance: Presumption of reliance (6) Proximate Cause: Chain must be of privileged relationships or Privity of information. (misappropriation theory)
21) Violation of Fiduciary Duty of Due Care a) BJR Applies up front to whole BOD. b) Plaintiffs: Shareholders c) Defendants: BOD as a unit. d) Duty: To act in best interest of the shareholders as a rx prudent person by making decisions: i) Informed, after ii) Deliberation, with iii) the right experts, iv) And to disclose the facts to the shareholders. e) Breach: Acts or omissions of business judgment that are do not meet the elements above. f) Intent: Gross Negligence required. i) Waste and Spoliation for compensation. g) Causation: “But for” factual cause. h) Damages: Losses must occur as a result. Monetary or Goodwill. i) Defenses: Voted against, abstained, proper expert, BJR, Articles provision. 22) Violation Duty of Loyalty a) Plaintiffs: Shareholders b) Defendants: BOD, a Director or Majority Shareholder. c) Duty: to not enter into conflicts of interest. i) Self Dealing – Insider & on both sides of transaction. (1) May be approved by SH or BOD if fully informed. ii) Corporate Opportunity – Insider competes with the Corp. iii) Parent / Sub Non-Merger Transaction (1) Initial burden on Minority SH’s to prove Maj. SH got a benefit to the detriment of Min. SH’s. (2) Burden then shifts to Parent to prove a “High degree of fairness.” (3) Then BJR locks on iv) Parent / Sub Merger Transaction (1) Minority shareholders take a loss (2) Majority (Parent) must prove: (a) Fair Price (b) Fair Dealing (3) Then BJR locks on 23) Violation of Duty of Good Faith (a) Duty to have information gathering processes in place. 24) Violation of Duty to Auction Situation: (a) Corp puts itself on auction block (b) Corp enters into a transaction that will end in bust up merger (c) Corp Sells control Required Actions: (a) Dispose of all defense mechanisms (b) Consider all offers (c) Get the best price 25) Defending against a Takeover (a) BJR does not attach until: (b) Moran 2 Prong Test is passed by defense: (i) Rx belief a threat to corporate policy existed
(ii) Are defensive mechanisms rx compared to threat posed? (iii) Burden shifts to plaintiff to show breach of fiduciary duty.
HOW TO INCORPORATE (1) Pre-Incorporation Phase
a. Joint Venture: two or more people coming together for a specific business purpose. In effect prior to Documents being filed. b. Promoter Liability i. Promoter: A person who gets a corporation set up by entering into K‟s prior to articles becoming effective. ii. General Liability Rule: 1. Joint Venturers (Co-Promoters) are jointly and severally liable under partnership law. 2. Jointly and severally liable for obligations of K‟s entered into prior to incorp. date with Corp once set up unless: a. The K does not list the promoter and the promoter signed as an agent of the corporation. I.e. Name, Agent. b. The K expressly states that the 3rd party shall look solely to the Corp and not promoter for fulfillment of the K and the Corp assumes the K under a novation agreement. iii. Corporation Liability 1. A Corporation is not automatically liable for a promoters K‟s. 2. Public Policy is to avoid fraud 3. Corporation must adopt through Director‟s (or Stockholder‟s if closely held) the K‟s entered into by Promoters 4. Even if Corp. adopts K, still must give promoter a novation per the section above to release their liability. c. Types of Corporations (two types): i. Closely Held (two types) 1. Non-Statutory Closely Held Corps a. A few stockholders (less than 70 or 80) b. Stock not publicly traded c. Common stockholders have no voting rights d. Board of Dir. And Officers 2. Statutory Closely Held Corps a. Stockholders manage the Corp b. No more than 35 stockholders c. Stock is not publicly traded
d. May be specified in Articles. ii. Non-Closely Held d. Documents Required to Incorporate i. (1) Articles of Incorporation Filed with the secretary of state. Five Mandatory Items 1. Name of Corp. 2. Purpose Clause (General or Specific) 3. Agent for Service of Process 4. Capitalization – classes of stock and enumerated powers 5. Execution by Incorporator Suggested Provisions 1. Duration 2. Limitations on Liability – Indemnify and hold harmless directors for liabilities of corporation. a. Still personal liability for breach of: b. Due Care c. Fiduciary Duty ii. (2) Bylaws 1. Not a public Document 2. Determines how the corporation is managed 3. Normally stockholders can amend without board approval. 4. Stockholders cannot manage directly unless it is a closely held corp or they are on the board. 5. Missing? e. Types of Stock i. Par Value. ii. No Par Stated Value. Nothing stated in Articles, Director‟s state later in the corporate records. (2) Post Incorporation a. Amending the Articles of Incorporation b. ACTIONS AGAINST CORPORATIONS / DIRECTORS / OFFICERS (1) Premature Commencement (2) Defective Incorporation a. A way to defeat the general limited liability of shareholders and hold liable when corporation does not live up to obligations under K or when contracting party wants to invalidate K. b. Two jurisdictional views:
i. MBCA: not valid incorporation until the stamp date. Stockholders, Officers, and Directors personally liable prior to stamp date. 1. Even if articles substantively wrong, still conclusive evidence of a corp is stamped. ii. Non-MBCA: Three Defenses 1. Du Jurey: Substantial Compliance with all material conditions by date of act or omission from which claim occurs. Ex. Filed articles, paid fees. a. If proved, then corp deemed valid. 2. De Facto: two requirements a. Good Faith attempt to comply b. Corporation acting as a corporation and K in corps name. c. Good against all third parties 3. Estoppel: 3rd party should have known a. There is a holding out of the corporate form. b. The third party relied on the corporate form. c. Only works against a single third party. c. Only Active stockholder‟s liable. (Verify Correctness). i. Passive stockholders should only take dividends and vote, that‟s it. (3) Piercing the Corporate Veil a. Rule of Thumb: Follow the money. b. Piercing to Individuals i. Piercing in Contract “Both” # 1 & 2 ii. Piercing in Tort Either / Or: 1. Inadequate Capitalization to run biz 2. Failure to observe corporate formalities. a. No books b. No meetings c. No elections d. Use of corporate prop for non corp purpose. e. When same officers and directors between two companies. iii. use of corp for illegal purpose iv. Note: Personal guarantee by officer or stockholders on loans is contractual and does not impose tort liability. c. When parent / subsidiary relationship: i. Disregard the corporate entity if a parent company owns at least 50% of another company ii. Or if company is owned at least 50% by another company. d. Horizontal Piercing “Enterprise Theory”: i. When several corporations controlled by same parties each with different assets. Argue for same purpose.
(4) Ultra Vires: “Beyond Powers.” An action claiming that the corporation or it‟s officers have committed acts outside their respective powers and/or authority a. Used for: i. (1) violations of the “Specific Purpose Clause” or, ii. (2) Charitable donations by Company. (Look to Due Care and Loyalty here too). b. Can be a defense to a Loyalty / Self Dealing Action if there is a “Specific Purpose Clause” in the articles. c. Three possible plaintiffs: i. (1) Individual Shareholder ii. (2) Shareholder Derivative iii. (3) Attorney General (5) Violation of fiduciary duty (Duty of loyalty and due care) a. Katsowitz Case: Freeze Out by Dilution b. Gottfried Case: Lack of Dividend Payouts. i. Defense: Board reserves funds for a business purpose. MANAGEMENT OF THE CORPORATION: ACTIONS BY DIRECTORS: Amending the Articles of Incorporation a. Director‟s decide, b. Take to stockholder‟s for a vote Director Physical Meeting Requirements (1) Notice: Director‟s must be notified at least 24hrs in advance (2) Quorum: Majority of all director‟s present. (3) Valid Vote: Majority of those present Director Non-Physical Meeting Requirements (4) Written Consent: Unanimous if without a physical meeting. 1. McShaw Exception: If a director enters in a K without prior BOD approval, K is valid if it is (1) a closely held corp, and (2) all directors approve afterward with full knowledge, and (3) K can‟t harm corp or shareholders. (what about promissory estoppel?) If the Director was also an office he might be authorized to enter into K. CAUSES OF ACTION FOR THE ISSUANCE OF STOCK Action Not Authorized by Articles Lack of Adequate Consideration (1) Pertains to initial distribution (2) Property or services rendered must be valued by the board. a. Test for adequate value: b. (1) Good Faith c. (2) Fair Value
(3) Over or underpayment of cash = Bonus Stock. i. Remedy = will be cancelled (4) Over or underpayment of property = Watered Stock i. Can have an adjustment made. (5) Defenses i. Good Faith Jurisdiction 1. Good faith is defense 2. ex. Relied on an expert. ii. True Value Jurisdiction 1. Hard line at actual value, Cannot be off one cent. Lack of Management Authorization MANAGEMENT PRACTICES (Common Law Closely Held Corp). Director‟s Vote on all ordinary items (1) Dividends (2) Contracts Stockholders vote on extraordinary items (1) Board Election (2) Amending Articles & Bylaws (3) Mergers & Consolidations (4) Dissolution and Liquidation (5) Stockholder agreements as to ordinary matters are void. (Statutory Closely Held Corporations) Operate like a partnership – stockholder managed. Must be stated in Articles “This is a close corporation” Easier to pierce the corporate veil. (why?) Types of Boards of Directors: (1) Straight – Everyone elected every year (2) Classified – Classes of stockholders get to elect a certain number of directors periodically. (3) Staggered Boards - Only a portion comes up for election each year. REMOVING A DIRECTOR For Cause: (2) Specific Charges (3) Adequate Notice (4) Full Opportunity for Director to defend himself. Not for Cause: ? BOARD COMMITTEES
The Board acts through committees. NYSE requires majority of BOD members to be independent All Directors on the following committee‟s must be independent: (1) Audit Committee (2) Corporate Governance / Nominating Committee (3) Compensation Committee (4) Litigation Committee (5) Merger Committee POWER OF OFFICERS 1. Express Authority (from the board): VP, Pres, Secretary, Treasurer: 2. Implied Authority if another higher officer becomes incapacitated. Causes of Action: When an officer enters into a K, is it valid? Express authority can be granted by board Always ask for a certified resolution. President has implied authority See if a person is wearing more than 1 hat. McShaw Exception. TRANSACTIONS IN CONTROLLING SHARES A sale of substantially all of the assets of a corporation is up to Stockholder Vote because it is extraordinary. STOCKHOLDER MEETINGS: Cause of Action: Lack of validity Personal Meeting 4 Requirements to be valid: (1) Notice – no less than 10 nor more than 60 days (2) Quorum – Directors Meeting: based on heads Shareholders: Based on shares (not votes?) (6) Record Date – only owners as of record date on company‟s books can vote. However, can get a proxie from the seller. (7) Proper - The matters to be voted on are proper. Written Meetings (1) Same as above but, requires majority vote (2) Electing Directors requires unanimous written consent. Types of Voting: (5) Cumulative – CA corps can elect this unless more than 100 stockholders, then mandatory. (a) Voters who under straight voting would have one vote for each open director‟s spot, can take their # of votes * director‟s seats and that‟s the total number of votes they are entitled to cast. They can cast them for any one or more people they care to.
Any person who meets a minimum threshold (i.e. the top three vote receiving candidates) is elected. Therefore, is 100/(1+n)+1 = % of votes needed to be cast by minorities, where n is the # of candidate seats available, then that person is assured to be in the top echelon that gets elected. (6) Straight – One vote per stock holder‟s share. Each open director‟s seat is voted on at a time, therefore a majority shareholder always have control. Aggregating Minority Shareholders (1) Pooling Agreements - Loose confederation. As long as vote on proper matters, then ok. (2) Voting Trust – Trustee aggregates votes as record owner, real owner is beneficiary. a. Must be written and filed with corporation (then becomes irrevocable). b. Trustee has legal title, stockholder has beneficial title. c. Duration not longer than 10 years d. Matters voted on must be proper. i. CL corp: Extra-ordinary matters ii. Close corp: ? iii. Trustee‟s are fiduciaries of the beneficiaries. Void if elements not met or trustee causes substantial harm to other shareholders. Proxy Regulation Proxy = Any kind of solicitation of a vote Personal Liability for solicitor? What is this shenanigans about with § 27 1933 Act giving a “derivative” and “direct” cause of action? JI Case v Borak § 14(a) Cause of Action for failure to file a proxy solicitation. (1) Must be a proxy solicitation (2) Must be interstate commerce (§ 5) (3) Regulated under ‟34 Act Cause of Action: 14(a)(8) Lookup Cause of Action 14(a)(9): Materially False and Misleading statements or omissions in a proxy solicitation 14(a)(9). Each false statement or omission is a separate count. An acquiring company in a merger could be liable for this cause of action. (1) False or Misleading Statement or Omission (2) Materality = Substantial likelihood a reasonable shareholder would find the fact important. (3) State of Mind: Only Simple Negligence required. (4) Causation
a. Essential Link Test (replaced „But for‟ test): The suing shareholder‟s vote must be required to pass the action. i. Suing shareholder must have voted against action. ii. If lied to and voted for, can still sue. iii. Exception: if don‟t like stock price can ask a state court for an appraisal (if there is a statute supporting 14(a)(9). (5) Damages (lower stock price etc) Shareholder‟s Proposal = requirement that company or BOD take action. (1) Presented at a shareholder meeting (2) Eligible Parties: Must have owned continuously for at least 1 year by the time the proposal submitted at least $2000 or 1% of the company‟s securities. Must continue to own through vote. (3) Must prove ownership and write letter or intent to continue holding through shareholder vote. (4) When may a proposal be excluded (P. 781): a. When it deals with ordinary matters, unless it relates to public policy b. Any proposal regarding placing directors that does not come from the nominating committee c. Redress of a personal claim d. Improper under state law e. Illegal f. Violates proxy rules (material misstatement) g. Conflicts with management proposal h. Already Substantially implemented i. Duplication of an existing proposal j. Resubmission w/in 3 years. k. Materially hurts the minority stockholders.
Deadlock
When there is no agreement and not enough votes to act. Actions: (1) Amend Bylaws to break deadlock a. Directors make amendment b. Stockholders approve i. Cannot substantially harm any stockholders. (2) Judicial ruling to a. Dissolve corp. i. When deadlock is causing irreparable harm, courts will look to equity.
ii. Must show oppression and ask for involuntary dissolution. b. Majority buyout minority i. Court will appoint appraiser to value corp and shares. c. Appoint provisional directors i. The director will be an officer of the court and must report to the court. ii. Still owe duties of due care and loyalty to shareholders
Fiduciary Duties – Used in a derivative lawsuit.
Umbrella: Business Judgment Rule. Applied to the BOD as a whole. Evidentiary presumption that presumes that the BOD is making decisions with due care, good fiath, and loyalty.
Due Care – business judgment that is not a conflict of interest.
i.e. independent directors deciding compensation of officers. Compensation in a publicly held corporation is held to a “waste and spoliation” standard. If directors setting their own compensation go to loyalty: self dealing. State: BJR Applies up front. Plaintiff: Stockholders in Derivative action Trigger: BOD acts or does not act. Duty: To act in the best interests of the shareholders. Standard of Care: (1) Directors must act as a reasonable person in similar circumstances. (2) Duty to be informed (reasonably ascertainable.) a. Always have the right consultant. (3) Duty of deliberation, so no unanimous written agreements. (4) Duty to disclose material facts to shareholders. (5) Perhaps a duty to non-shareholder constituents: Community & employees (Not on test).
Breach: When poor business judgment leads to loss. Gross negligence required. Van Gorkam Case. Waste and spoliation in compensation. Causation: “But for” the decision losses would not have occurred. Losses (Required): Monetary and Goodwill Defenses: (1) Business Judgment Rule not rebutted (presumed actions taken with due care). (2) Provision in the Articles (3) Relied on proper expert in good faith (4) Voted against and reflected it in the minutes (5) Wasn‟t there (6) Abstained and let record reflect it (7) No Duty to speak. Thus the “no comment” reply. Remedies: (1) Monetary Damages (2) Punitive Damages Examples: (1) Inappropriate compensation, (2) (Good faith?) Board must decide whether or not to sue itself for bribes made by a subsidiary. Appoint an outside committee and use experts so have a defense of using the right experts in good faith. Gall v. Exxon Mobile
Good Faith
(1) Duty to act in good faith. (2) Good Faith = having a system in place by which directors can receive good information from the ordinary activities of the company so they can be fully informed. (3) Defenses: Business Judgment Rule Examples: Ovitz v. Eisner, no math done on Ovitz compensation package may be bad faith.
Loyalty – Deals with conflicts of interest.
No Losses Required Four Standard Ones: (1) Self Dealing
a. Definition: When a transaction would advance the direct or indirect Interests of a director(s) (what about officers?) at the expense of the stockholders. i. Setting own compensation. Look to industry standards and type of position. ii. Indirect Personal interests of a director: A transaction between an entity the director owns or is on the BOD, or an officer of. b. BJR does not apply as against a single Director because it only applies to BOD as a whole. c. A Majority Stockholder does not have a fiduciary due care duty, just loyalty because not in a management capacity. d. Plaintiffs: Shareholders. e. Examples: i. General conflicts of interest. ii. Conflicting Compensation, i.e. loan to director from corp to buy stock in Co. iii. Transactions between corps having common directors and officers, absent shareholder approval. iv. Waste of corporate assets for director personal use. v. Buying RE from a director. vi. Fraud or severe over reaching of authority. f. DEFENSES: Stockholders can void transaction, unless i. Fully informed disinterested Stockholder Approval. (conflicted parties may not vote). Must be an ordinary matter?. ii. Fully Informed disinterested directors approve (conflicted director must abstain but can be counted for quorum). iii. There is intrinsic fairness in the transaction to the corporation (judicially decided). 1. Benefit to stockholders (2) Corporate Opportunity a. Director or Directors that are taking a business opportunity that is in the line of business of the corp they work for.
b. Plaintiffs: Corporation itself, stockholders itself in a derivative action since directors are reticent to go after each other. (3) Parent Subsidiary Non-Merger Transaction (Sinclair Case) a. Fact Scenario: Forcing subsidiary to pay out excessive dividends (more than net profit) or sell off assets and pay to parent. b. Plaintiffs: Minority shareholders suing the parent corp and the board of the subsidiary. c. Initial pleading burden on minority stockholders to show that the parent received a benefit to the exclusion of and detriment to the minority shareholders of the subsidiary. d. Then the burden shifts to the parent to show there is intrinsic fairness in this situation. “A high degree of fairness” (4) Parent Subsidiary Merger Transaction a. Plaintiff: Minority shareholders of the Sub being hurt b. Board has burden to prove: c. (1) Fair Dealing d. (2) Fair Price e. Then BJR locks on f. There should always be a mergers and negotiations committee g. Defenses: Proper Expert who issued a fairness opinion. (5) Duty of Honesty a. Duty to act in the best interest of the shareholders.
BRINGING A STOCKHOLDER DERIVATIVE ACTION:
Determine if: (1) Demand Required: a. Board Truly Independent i. Not financially beholden ii. Possibly not friends b. Must bring to board first and they appoint special litigation committee. i. Litigation Committee can move to dismiss. 1. Court will look to ethical and commercially right thing to do when determining if a litigation committee‟s move to dismiss is ok. (2) Demand Excused
a. Board Not Independent b. Take to Court First (3) Post a Bond with Court (4) Must have owned stock from the time the cause of action arose.
CAPITALIZATION
5 Areas: (1) Stock Rights (a) Basic (i) Voting (ii) Dividends (iii)Liquidation (b) Advanced (i) Dividends 1. Mandatory 2. Pre-Determined Amount 3. Cumulative (ii) Redemptions 1. Usually a corporations right 2. Different from a repurchase (how) (iii)Conversions 1. Between Common & Preferred or Debt and Equity. (iv) Dilution Purchase Pre-Emption 1. Additional allotment available for purchase when new stock issued.
(2) Issuance of Shares
(a) Lack of Adequate Legal Consideration: (i) If none, then there is a cause of action. (ii) Remedy: cancellation of stock (iii) Two tests to determine if ok 1. Qualitative Test: # of shares x par value a. If Not Enough Cash called “Discount Stock” b. If Not Enough Property: “Watered Stock” c. If Not enough services rendered “Watered” d. A Note: Ok if secured.. 2. Quantitative Test: (How is this different?) (iv) This is why options are given to employees because giving stock does not pass legal consideration test. (v) Two Jurisdictional Tests for adequate Legal Consideration: 1. Good Faith Juris: Meeting Quantitative Test is good enough 2. True Value: Cuts no slack. Can‟t be a penny off. (b) Common Stock (i) Usually has voting rights (c) Preferred Stock (i) Dividends first (see articles) (ii) Guaranteed Dividend (see articles)
(iii) Liquidation Preference (iv) Cumulative Dividend Preference 1. If funds available, then dividend mandatory. 2. Otherwise right snowballs (v) Redemption Rights 1. Corp has to buy back stock at holder‟s prerogative.
(3) Investment Contracts
Regulated by SEC under Sec. 5 of 1933 Act Puts, Calls, Futures, Profit Participations, Pyramid Scheme‟s and Franchises can all qualify. Register or find an exemption. (a) Elements: (i) Money or Legal consideration invested (ii) Two or more investors similarly situated (iii)Expectation of profit (iv) Investors are passive (rely on efforts of others) (b) CA Elements: (i) Broader, “Any capital at risk” (4) Redemptions and Repurchases (5) Pre-Emptive Rights (a) Pre-emptive rights must be negotiated for. (b) Can Sue on only if express (6) Dilution (a) The ability of the company to make issue more stock, and perhaps make stockholder‟s purchase it (b) Must be in the Articles under it‟s own separate provision or in capitalization provision. Encumbrances on the Transfer of Stock: (1) Must give adequate Notice a. Posted in Articles and on Stock Certificate in conspicuous type. (2) Reasonable Encumbrance a. No restriction on the transfer of shares is binding on shares issued before the adoption of the restriction resolution unless the shareholder voted for the resolution
DISTRIBUTION OF CORPORATE FUNDS
Causes of Action: (1) Motion to Compel Dividends a. Bad Faith, (Dividend motivated by personal interest, not corp welfare), or b. Lack of business purpose. c. Preferred shareholders with cumulative rights may gain ability to sue on this.
(2) Lack of dividend payment (a) If Public Corp: Prove lack of business purpose (b) Of closely held: Prove bad faith (Intense hostility). (3) Legality of distribution Two tests for legality, both must be met: (7) Proper Source 1. Paid-In Surplus Amount sold for over par value. 2. Earned Surplus Making money and keeping it in the corp. 3. Cumulative Dividend Preferences need to be paid off (1) Solvency 1. Assets > Liabilities 2. Must be able to pay debts as come due. (2) If cannot sue on dividends, sue people who received dividends
Types of Distributions: (1) Dividends (2) Redemptions - Mandatory (3) Repurchases - Optional. 3. 4. Determine type of corporation dealing with Determine what we want to achieve. GET MONEY.
INSIDER TRADING
Reg. 10(b)(5) Action CLASSES OF LIABILITY (put into outline of elements below): Plaintiff: Both a private (for contemporaneous purchaser or seller) and an SEC right of action (§ 20a 1934 Act) against: Defendant: Actual Purchaser or Seller who is a (1) Self Trader a. Must be an insider b. Personal Benefit (financial or otherwise) (2) Tipper a. Must be an insider (Dir. Officer, controlling stockholder, familial relation does not make you a constructive insider), or b. Constructive Insider (Someone in a position of trust and confidentiality. c. Information must be material.
i. Substantial likelihood a reasonable person would find the info important. (3) Tippee Derivative Liability a. Tippee‟s Tipper must be an insider b. Tippe knows or should have known this is inside info, and c. Tipper was breaching a fiduciary duty in passing on that info d. Willful intent to trade on information i. Reckless disregard also a possibility e. Tippee Trades f. Financial Benefit Defenses: Adequate disclosure and adequate time to react (10 minutes these days). Publicly held corps have (4) Misappropriation Theory: Similar to proximate cause. When does the liability stop in the chain of passing of insider info? (1) Liability limited to situations of fiduciary duty, or under SOX someone in Privity of information. a. Broker / Client (only negligence need be proven) b. Attorney or Accountant / Client c. Doctor / Patient d. Priest / Parishioner e. Trustee Charge on misappropriation if the above causes of action fail. 10(b)(5) ELEMENTS: (Look for in a Merger)
(1) Proper Plaintiffs: Actual purchasers or actual sellers or SEC (2) Proper Defendants: Made a false or misleading statement or omission and are named with their self trader, tipper or tippee status delineated. (3) Insider: Tipper or Tippee must: (1) be either a constructive (on test) or traditional insider and (2) there must be a benefit (always there).
Constructive insider is person in position of trust or confidence. Family `member doesn‟t count.
(4) Tippee liability: Tippee‟s Tipper must be insider and meet elements above as well as (3) have breached a fiduciary duty. (5) Put down what each Defendant‟s duty is.
(6) Materiality: Was the information material under 14(a)(9) that there is a substantial likelihood people would find material. (All info on test will be hard – same materiality test as for 14(a)(9) - substantial likelihood a reasonable person would find material) SOFT INFORMATION: NOT ON TEST: Preliminary Merger Talks: Info only material if there is agreement on
(Levinson):
(1) Price – reliance proved is Plaintiff says relied on price (2) Structure of the Merger OR, DIFFERENT TEST (Texas Gulf Sulphur):
(3) Probability of the occurrence balanced with, (4) The Magnitude of the scenario. a. Always present unless Short Form Merger (one 85% majority shareholder)
Directors have a duty not to lie. Hence “no comment” (7) Reliance: Was there reliance? Put down that there is a presumption of reliance. (8) Causation: There is a presumption that the tipee has used the inside information. (9) Scientur: Willful intent required, not just reckless disregard. Circumstantial evidence can prove Scientur. (10) Remedies: Treble Damages, Right of Rescission If cannot prove 10(b)(5) then go after Misappropriation. On test, but not for Tippee or remote Tippee liability.
TAKEOVERS (Due care and Loyalty Causes of Action)
Accomplished by a Tender Offer A solicitation to buy shares made directly to stockholders Two Types: 1. Friendly – Go to BOD first. Called a bear hug. 2. Hostile – Straight to stockholders. State Law: State law may affect interstate commerce and federal jurisdiction to the extent that the state has an interest in defining the attributes of shares in its corporation and in protecting shareholders. Control Share Acquisition Laws are legal and constitutional. Bidder: (1) Duty of Due Care to make sound business decisions to own shareholders. (2) Protected by BJR if (3) Fully Informed (Van Gorkom) Target
(1) Duty of loyalty to act in the interest of own stockholders. (Moran). Shareholders may sue corp in derivative action for lost profits and equitable relief to make BOD approve merger. (2) When BOD implements Defensive Measures, there is a: (3) Presumption action in BOD‟s self-interest (Moran Case). Therefore; (4) For BJR protection, must show: a. Reasonable Belief – i.e. a reasonable threat to corporate policy and effectiveness existed, requires showing BOD acted in: i. Good Faith belief, founded on ii. Reasonable Investigation iii. Shown by legitimate business purpose in defending against takeover. iv. Burden heavier is the threat is perceived and not actual b. Reasonable Defensive Actions in relation to threat posed. (2) If BOD accepts takeover: a. Due Care action of losses ensue. BJR applies however. (4) If BOD says “no” but takes no defensive actions: a. Due Care action if losses occur. (5) Duty to Auction: If a takeover is a sale of control (control being vested in one entity that is a majority shareholder). (never in Parent / Sub Merger). a. All defensive mechanisms come down automatically. b. BOD must get best price. Defenses to Control Takeover (all subject to Fiduciary Duty of Loyalty)(know all): (1) Get court to protect under Control Share Acquisition Law (2) Porcupine Provisions (On Test): (1) Taking out cumulative voting from bylaws or a (2) requirement of a supermajority vote (a problem if over 85-90%). (3) Lockup – Setting aside securities for purchase by friendlies. (4) Golden Parachutes – Make very expensive to fire management. (5) Tin Parachutes – Covers everyone in corp. unreasonable. (6) Pac-Man Defense – Turn around and make cross tender offer. (7) Scorched Earth – Never appropriate. Sale of all assets to make unattractive. (8) Crown Jewel – Not reasonable. Sell off the core of the company (IP usually). (9) Poison Pill – No rights vesting in controlling shares purchased. a. Board must state in minutes they are concerned about “Bust Up” merger. (10) Lollypop – “Self Tender Offer” - Company tenders offer to all shareholders to repurchase except the aggressor.
ANALYSIS LOGIC CHAIN Check to see who plaintiff‟s are In Merger go after Derivative Action for Loyalty or Due Care, depending on whether suing offeror or offeree. If don‟t win on Loyalty or Due Care: Sue on basis that the meeting was invalid or Due Care (offeree).
In 10(b)(5) action Go after action, if fails, go after misappropriation.